It’s a dreary time for Bay Area venture capitalists. Investments are slowing and exits are stalled. Venture capitalists don’t expect the I.P.O. drought to ease until 2010, according to a new survey of dealmakers by audit, tax and advisory firm KPMG. Only 9 percent of those surveyed think I.P.O. activity will pick up next year and 12 percent predict it will never again reach historic levels.
A July 1 survey by the National Venture Capital Association found investors to be more optimistic, with 43 percent predicting that public offerings would pick up in the next 12 months. Only 5 percent thought it would take longer than two years. Still, they said that two-thirds of venture-backed companies were less likely to want to go public than they were three years ago. They blamed the drought on skittish investors, the credit crunch and the regulatory requirements of the Sarbanes-Oxley Act.
Paul Kedrosky, an investor and senior fellow at the Kauffman Foundation, takes the more pessimistic view. He doesn’t see the I.P.O. markets opening up for several years and predicts dire consequences for venture firms. “Self-serving protestations to the contrary aside, there is no institutional venture market without regular and sizable IPO exits. With 10-year venture returns set to soon lag long term S&P returns, this is an asset class in a serious state of brokenness,” he says.
Only five venture-backed companies went public in the first half of 2008, while 86 went public in 2007, according to Thomson Reuters and the National Venture Capital Association. The percentage of dollars going into first-time financings hit its lowest mark since 2004. That’s in part because venture capitalists are being forced to invest new rounds of capital in late-stage companies that they expected to have gone public or been acquired by now. Firms have extended their exit timelines by a year or more, KPMG found.
“I am convinced that the I.P.O. market will be largely unavailable or unattractive for at least the rest of 2008 and for the first half of 2009,” says Jim Breyer of venture capital firm Accel, an early investor in Facebook, where Breyer is on the board. “We are advising our portfolio companies to view their cash as particularly precious in these difficult times.”
When the market does turn around, investors say green technology will lead the way, with mobile and digital entertainment following. They predict that international investing will pick up and expect China, India, Brazil, Russia, Israel and Qatar to be attractive markets, the KPMG survey found.
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Exits are largely stalled because venture capitalists have, for the most part, decided to invest in the same thing: social networks. Almost all of these companies have no business models and offer nothing new, so there would be no good reason for them to go public, anyway. Consequently, some entrepreneurs are pessimistic, as well, since they know that they won’t be funded for legitimate enterprises that fall outside the tried-and-true (but generally unprofitable and unsustainable) world of Facebook applications. My full take is here:
http://www.huffingtonpost.com/aaron-greenspan/all-is-not-well-in-silico_b_113226.html
— Aaron GreenspanVC industry has lost its glamor of decades ago that had led new ventures to grow.
— QuemannVC firms are supposed to outshine all the bright spots, even amid the gloomy economic outlook, but are currently spitting out the gloomier forecasts.
It means that they are venture capitalists no longer but greedy money lenders blind to the future.
Pessimism from VCs doesn’t necessarily mean the tech industry is broken… and in this case, it more likely just means the venture capital model is broken.
Internet startups take MUCH less money to build these days, and if the startup does well it’s MUCH more likely to get acquired early by some other internet platform company than it is to make it to IPO. there are plenty of angels in silicon valley to help get startups rolling… not all startups need or require venture capital, or big VC rounds.
and that’s… OK.
in summary, the trends are these:
— dave mcclure* less capital-intensive businesses
* more small exits thru acquisition
* more deals financed by angels & small funds, not big VCs
If you think that all technology VCs are investing in social networks, you clearly don’t know much about VC investing.
The fact of the matter is that there are established, profitable enterprise software companies that can’t go public because of current market conditions. It has very little to do with the profitability or attractiveness of social networks.
— Jeffrey McManusVC funds in the last 5-7 years have gotten just like the hedge funds–it’s a fee based business. A $500M VC fund will throw off $10m+ in fees a year. So, no Midas-like riches, but I don’t hear many of the VC’s complaining about 6 or 7 figure annual salaries.
— Angel ManThe passion is gone from the VC industry–it’s moved to angel investors.
The suckers here are the limited partners who with very, very few exceptions shell out 2-2.5% for “management fees.” General partners, in many if not most firms are taking in 7 digit paychecks.
— bubbleboyHow many VC’s are out there investing in trully cutting edge biotech, nanotech, and alternative energy tech? I am sure there are some… But any VC investing in a “social network” is simply nothing more than a loan shark; no different than the guy next door who tries to flip a few buildings for a profit. At this time in the development of our economy internet and software technology is mainstream, and the barriers to entry for new businesses are very low; there is no reason to invest significant money into these companies, they ought to be near profitable from the get go; myspace.com for example was a small side project at Intermix media that happen to take off and was making real money in ad revenue.
Who knows what the future holds for a company such as Facebook, but few entrepreneurs gives up a piece of a company unless they really need the cash; Mark Zuckerberg has said that he has no intention of taking that company public, thus it begs the question of how do Facebook’s investors expect to recoup their cash? Given today’s economy I’m willing to bet that at some point FB will be desperate for cash and Zuckerberg will be forced to make a deal with the devil; Steve Balmer will be more than happy to bring FB into the fold as a marque of MSN.
I can’t wait until MS has access to that giant data warehouse of consumer information for an entire generation. I’m sure they will figure out how to turn it into cold hard cash. Just tie that data in with their ad network and, for example, users of a cellular phone network for some real targeted mobile advertising … the advertising possibilities are endless.
— Dominik Zynis